Market Commentary – December 2021

Pre-Christmas interest rate rise sends message

At the Bank of England’s Monetary Policy Committee (MPC) meeting on the 15th December, the committee voted by a majority of 8-1 to increase the bank rate by 0.15 to 0.25%. With many thinking the rise would come in November, the MPC show they are still able to surprise us by leaving the increase until just before Christmas, when it was thought any increase may have come instead in the new year. Although a modest increase, the rise demonstrates the MPC’s intention to get tough on inflation in the coming months.

Concern over rising inflation remains

Although much of the news was concerned with translating the effect of the interest rate rise for mortgage holders. For example, the addition of just over £15 to the monthly repayment amount of a tracker mortgage, and nearly £10 a month to the repayments of a standard variable rate mortgage. The impact of the interest rate rise won’t materially be felt for 12 to 18 months, and was overshadowed, by experts, of concern of still-rising inflation and the resulting impact on the cost of living.

Although, the average wage in the UK is rising at the fastest rate since 2008 and unemployment is low, wage growth is patchy, and the fastest growth is in sectors that saw wages fall sharply in 2020. In addition, UK GDP grew by only 0.1% in October as relatively robust growth in services was mostly offset by a contraction in manufacturing and construction as supply chain disruption bites. 

Highest inflation in ten years

At 5.1%, inflation is the highest it’s been in a decade, more than two-and-a-half times its 2% target, and still expected to rise further. In the BBC’s commentary, Bank of England Governor, Andrew Bailey, said, “strong inflationary pressures” still need to be tackled, and that inflation may rise to as much as 6% in the next two to three months. 

The OECD (Organisation for Economic Co-operation and Development) released its biannual economic outlook, which leaves global growth forecasts more or less unchanged, but raises concerns the Omicron variant threatens to intensify supply shortages and put yet more upward pressure on inflation. 

Energy prices and supply chain disruption puts pressure on consumers

Business groups consider the recent interest rate rise to be ineffective in helping prices to stay low and that global factors, such as wholesale gas prices sending energy bills skywards, and supply chain disruption, are more likely to affect consumer spending.

Many of the underlying drivers of inflation are still due to COVID-19 reopening, as well as the new labour shortages caused by the rapidly spreading coronavirus variant. In addition, petrol and diesel prices are the highest on record, with used car prices up almost 30% in 2021, due to the chip shortages restricting the number of new cars available. 

Optimism around UK retail

However, November’s CPI shows robust retail activity with recreation and clothing prices both rising quickly. This is confirmed by the latest figures for UK retail spending, which show that sales increased by 1.4% in November and are now noticeably higher than pre-pandemic levels. Many retailers have also reported very strong pre-Christmas trading, although December’s trading figures will be closely watched to see whether December spending was up, or whether shoppers made their purchases earlier. 

Omicron gives cause to alter MPC’s GDP projections 

Although data shows that successive variants of COVID-19 have had less impact than the first wave, the new Omicron variant sweeping the UK and world, has caused bank staff to revise their GDP forecasts, since the MPC November report, down half a per cent, which would mean GDP is still 1.5% below pre-pandemic levels. Growth is hampered in many sectors, due to pressure on supply chain and precarious labour markets. 

Omicron affects investor behaviour 

The full resulting outcome of Omicron is yet to be seen, however, suggestions that the new variant is less severe, and the preliminary research from Pfizer suggesting that three vaccine doses can offer protection against Omicron, have calmed investors, following some anxiety seen in the markets. Even with some relative calm, and government measures for controlling Omicron in full swing, the markets have still been volatile with investors looking to the short-term and reacting from each month on the lack of inflationary fall.

Government support for Omicron affected hospitality businesses

Chancellor Rishi Sunak’s introduction of a new COVID-19 support scheme, will provide, through local councils, a package, in total, of £1bn for hospitality, leisure and accommodation businesses suffering from the spread of Omicron. 

Despite the new restrictions imposed by the UK government to stem the spread of the Omicron variant, such as guidance to work from home and mandatory masks for all indoor venues except pubs and restaurants, hospitality businesses have been the hardest hit. As the number of new daily coronavirus cases continues to rise, hospitality businesses have seen many challenges to their continued operation, including temporary, unplanned closures and loss of service due to isolating staff.

US gears up for interest rate increases in 2022

The US Federal Reserve has left interest rates unchanged in December 2021 but is speeding up its withdrawal of its emergency bond buying programme and has indicated that markets should expect three rate increases in 2022. 

Pressure on ECB to reduce monetary stimulus

The European Central Bank (ECB) left interest rates unchanged in December, but said it is withdrawing its emergency bond buying programme. Pressure to reduce economic stimulus continues in the form of 4.9% inflation in November, the highest level in over 20 years. Rising energy prices remain the main factor, but services and nonenergy industrial goods also contribute. The increase in inflation has raised concerns that price pressures will persist for longer than previously anticipated, which increases pressure on the ECB to reduce its support.

Omicron on global equities

Equity markets experienced a broad sell-off in November, most notably, highly valued US tech stocks, as concerns about the rapid spread of the new variant of COVID-19, caused a sell-off in global equities and dragged down the performance of 2021. 

The spread of COVID-19, and worries about inflation, were the two biggest headwinds for markets but UK equities are up around 17% for the year. The US is the only major market to produce better returns for UK-based investors. Other developed equity markets are also positive, but the strength of the yen means that in the case of Japan, gains have been modest. 

All that glitters… 

One surprise this year has been the poor performance of gold. Gold is traditionally seen as a hedge against inflation, but it has trailed for most of the year and is down around 5% in dollar terms. Reuters report at the end of December 2021, that gold has had its “worst performance in six years”.

Property – best performing asset class of 2021

Property has been one of the best performing asset classes this year, although it had a lot of ground to make up from 2020. Despite inflation and central bank interest rate rises being the subject of endless speculation as investors tried to anticipate when interest rates would begin to rise, house prices have risen the fastest in the last three months of 2021, than they have in the last fifteen years. 

Two of China’s largest property developers’ default on payments

After months of struggling to meet bond payments, China’s largest property developer, Evergrande Group, failed to make an interest payment of $82.5m. Kaisa Group Holdings, another heavily indebted property developer, was also declared in default and its shares suspended from trading following its failure to repay a $400m bond. 

The default of two of China’s largest property developers is a serious concern in a country where real estate represents more than a quarter of economic activity. Market reaction, however, has remained fairly muted due to Evergrande’s debt crisis having been ongoing since September. The initial fall in September appears to have been priced into recent market performance and Chinese high yield prices have remained stable with investors having shown no signs of surprise.

Asset ClassProxy1-Month3-Month6-Month1-Year
CashUT Cash/Money Market 00.00%-00.02%-00.01%-00.01%
Gilts FTSE Gilts All Stocks-02.32% 02.33% 00.60%-05.16%
UK Corporate BondsUT UK Fixed Interest-03.95% 03.15% 04.23%-00.54%
UK EquityUT UK Equities 03.46% 02.48% 04.02% 19.45%
European EquitiesMSCI Europe ex UK 03.34% 07.39% 06.42% 23.53%
US EquitiesS&P 500 03.84% 09.35% 12.25% 28.06%
Japanese EquitiesMSCI Japan 02.89% 01.33% 04.40% 13.44%
Emerging Markets EquitiesMSCI Emerging Markets 00.59%-00.32%-07.30%-00.23%
PropertyUT Property 03.51% 08.17% 10.22% 22.59%

Data Sourced from FE Analytics, and Bloomberg Finance LP.

*The value of your investment can go up as well as down, you may get back less than you originally invested. Circumstances are subject to change. Performance from the past or yields quoted should not be considered as reliable indicators of returns. This communication is for general information only and is not intended to be individual advice